The EBay economy evolves

Commentary: The new opportunity on the marketplace

BambiFrancisco

SAN FRANCISCO (CBS.MW) -- This week, millions of Americans are waiting for the Fed to change its policy on interest rates.

The way its auction empire is spreading its tentacles, one day the nation may be waiting for EBay's banking arm (which is called PayPal) to issue far-reaching decisions on rate policy.

Sounds like science fiction, right? Maybe so, but it's clear that EBay
EBAY, -0.87%
is creating an economy of its own. The leading online marketplace could see more than $20 billion in goods sold on its marketplace this year (that's less than 10 percent of the business Wal-Mart does, but give EBay time). This week, they're staging their second annual EBay Live event that brings together the companies that thrive on the auctioneer's juggernaut.

Attendance is expected to double vs. last year, as 10,000 vendors and observers from more than a dozen countries head to Orlando, Fla., to learn how to build a business on EBay. The company estimates around 150,000 people are making a living off its marketplace.

At a technology conference last week, I learned that there are some 700 so-called search-optimization companies. These are companies that help advertisers develop online marketing campaigns by using the advertising search services of Overture
OVER, +4.66%
Google, LookSmart
LOOK, -1.22%
Ask Jeeves
ASKJ
FindWhat.com
FWHT
Ah-Ha, Kanoodle, etc.

In its own right, EBay has spawned a legion of new companies attempting to assist EBay sellers.

Among the visitors to the Orlando event will be entrepreneurs offering services to prospective EBay-based business owners. That's another sign of the staying power of the EBay economy: More companies are making their livelihood off of the existing Internet survivors, rather than attempting to displace them.

The new 'day traders'

Take for instance Andale Inc., which just received a $2.7 million round of financing from backers such as Accel Partners. The Mountain View, Calif., company has 140 employees, up from 40 last year. It counts 67,000 paying customers, all of whom are EBay-holics who pay between $2.95 and $6,000 monthly for research regarding EBay's marketplace.

Some are "auction day traders," quipped Munjal Shah, Andale's founder and CEO, who hopes to satisfy the hunger for information about the flow of goods and services and pricing disparities that may occur on EBay. The reason Andale can offer this proprietary information, by the way, is because it licenses EBay's data, such as 52 weeks worth on all items listed and sold.

One product, to be unveiled this week at EBay Live, is earmarked for traders, who may also be big buyers on EBay. The product is called Andale search, or "The Google for EBay," as Shah puts it. The search product, which is free, lists items based on the last transaction price, not unlike the data you might see watching trading in stocks or commodities. In this way, a buyer can better gauge what to bid.

What's the potential market for this product? EBay deals with some 1 million people who trade goods valued at $500 or more annually, according to Shah.

Other products are earmarked for EBay's big dealers. Unlike individuals, these are business customers who move big volume, and EBay has some 60,000 to 65,000 of these power players. EBay doesn't break out the various categories of power deals, but last year it raised the minimum gross merchandise sales for its highest category to $150,000 from $25,000.

To be sure, most EBay players are small businesses these days. Shah estimates that 17 percent of its merchants account for 80 percent of the auctioneer's total sales. Furthering that trend, EBay is working on forming an alliance with the Small Business Association.

For these auction participants, Shah offers research that starts at $2.95 per month. At that price, Andale will provide recommendations, like which category an item should be listed under and whether paying for higher placement on the page will raise the probability of a sale. Another research product, costing $5.95 per month, is essentially an accounting ledger designed specifically to handle goods on EBay. There's also analysis on how to get higher average selling prices and increase "sell-through" rates.

The counter key

Andale's historical archive began with its "hit counters" -- which essentially track how many times a particular item is viewed on the Web. Andale has served as the auditor of record for measuring EBay traffic, and has since extended the contract with EBay for three years, says Shah. Now, about 1 million customers use the hit counters for free.

But these counters potentially hold the key to comparing costs between EBay and a competing search engine, such as Google or Overture.

Shah says that by being able to measure the number of hits an item gets on EBay, Andale can make a cost-per-click pricing comparison between listing goods on EBay and paying to be listed on Google. This service will be rolled out soon. It may even be useful to Google's 100,000 advertising customers and Overture's 80,000 advertiser clients or the 700 so-called search optimizers.

Andale does have an arrangement with Amazon.com
AMZN, -1.70%
to sell services to merchants seeking to auction goods on the retailer's site. But the auction market on Amazon.com, as well as Yahoo
YHOO
have not been as successful as EBay's auction platform in attracting a bustling trading community.

This business could potentially free Andale from being entirely dependent on the EBay platform.

But would EBay actually allow Andale to use its proprietary information in a way that may hurt EBay's business?

"I'm trying to bring massive transparency to a $20 billion economy," Shah explained. "Transparency should lead to more trust (and transactions) on EBay."

Indeed, even EBay acknowledges that. It plans on rolling out its own version of marketing services to help sellers build their businesses. Andale may find that its greatest threat comes from EBay in the long term.

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